Financial Soundness Of Banks Research Articles

The Effects of IMF Financial Soundness Indicators of Turkish Commercial Banks on the Financial Development Index

The financial soundness of banks, which are the building blocks of the financial system, is an important indicator that reflects the effectiveness of the financial system. It can be stated that the financial development of countries with an effective financial system will be positively affected by this situation. The paper aims to evaluate the effects of IMF financial soundness indicators of the Turkish commercial banks which have an important share in the Turkish banks, on the financial development index of Türkiye. In this paper, an evaluation was made based on the IMF Financial development index and IMF financial soundness indicators. Panel data analysis was used and panel least squares model estimation was made within the analysis. In line with the findings, it has been determined that sensitivity to profitability, liquidity, and market risks of commercial banks negatively affect financial development while the capital adequacy and asset quality of commercial banks positively affect financial development.

Linking Institutional Factors with the Financial Soundness of Banks. Evidence from the CEE Region

Linking Institutional Factors with the Financial Soundness of Banks. Evidence from the CEE Region

Corporate governance, credit risk and financial soundness of banks

Corporate governance, credit risk and financial soundness of banks

Financial Regulations, Profit Efficiency, and Financial Soundness: Empirical Evidence from Commercial Banks of Pakistan

The purpose of this paper is threefold. First, it measures profit efficiency and financial stability of commercial banks of Pakistan. Second, it empirically estimates the effect of the already implemented financial regulations on the profit efficiency and financial stability of banks. Third, it examines the differential effect of financial regulations on profitability and financial soundness across bank size. To carry out the empirical analysis, a balanced bank-level panel data covering the period 2008-2014 is used. To gauge the profit efficiency of commercial banks, Data Envelopment Analysis (DEA) is utilised, while, to proxy the financial soundness, the Z-score is calculated for each bank. The panel regression approach is used to examine the effects of financial regulations on the profit efficiency and financial soundness of banks. We find that the financial regulations enforced by State Bank of Pakistan (SBP) have significant impacts on the profit efficiency and financial stability of banks. The results indicate that the non-performance loans to assets ratio (NPLL) and the reserve ratio (RR) impact positively, whereas, the liquidity ratio (LIQR) and the loans to deposits ratio (LODEPOSIT), significantly and negatively affect the profit efficiency of banks. However, only LR and RR are positively and significant related to the financial stability. The results also suggest that the financial regulations have significant differential effects on the profit efficiency and financial soundness of banks across bank size. JEL Classification: C23, E44, G21, G28 Keywords: Profit Efficiency, Financial Soundness, Financial Regulations, Data Envelopment Analysis, Z-Score, Differential Effects

Reassessing bank monitoring models: an empirical analysis of the value of market signals in the period 2008–2020

One of the major goals of bank supervisors is to predict bank distress events. As the environment changes, it is crucial to reassess and improve the models used in monitoring banks. The financial soundness of banks is traditionally assessed based on accounting ratios. However, the incorporation of market information in these models may significantly improve its ability to predict bank distress. The present paper has two main objectives, the first is to assess if market information adds value to accounting-based monitoring models when the purpose is to detect bank distress situations. Further, it also seeks to understand if the predictive power of market signals increased with transparency requirements. To accomplish this purpose, a total of 81 distress events from a sample of 248 European banks between 2008 and 2020 were analyzed. First, a logit univariate analysis was used to evaluate the relevance of each accounting and market variable. Then, the optimal multivariate accounting-based model to predict distress events was constructed using a stepwise approach. Finally, the previous model was extended to include the relevant market variables. The results support the use of market variables in bank monitoring models. Further, the present study provides evidence that the predictive power of market variables increased after the strengthening of the information requirements set by the Basel agreements. It can be concluded that the results support the use of market information for banking supervisory purposes, especially, in transparent markets.Supplementary InformationThe online version contains supplementary material available at 10.1057/s41261-022-00194-4.

The effect of the efficiency of monetary policy educational tools on the financial soundness of banks A pilot study in the Iraq Stock Exchange (2007-2017)

The aim of the research is to identify the impact of the quantitative tools of monetary policy on the financial soundness of banks, and the research was based on a set of hypotheses, to determine the nature of the effect between independent and dependent variables, and for the purpose of testing research hypotheses, a number of financial ratios according to CAMEL indicators were used to analyze the historical data of banks, the research sample and the component From (7) banks for the period (2007-2017), the quantitative tools of monetary policy were used from the impact published in the Central Bank of Iraq, and a number of statistical methods were used, including time series testing, joint integration test and multiple regression test according to programs.EVIES10 has been reached through the research to a number of conclusions, the most important of which is that the CAMEL classification system is one of the effective supervisory methods for assessing the financial soundness of banks and determining the duration of the strength and durability of their financial positions and the extent of their ability to adapt to any variables related to their activities, as it ensures that the banks are moving in the direction. Correct or reverse, and the weakness of the monetary policy tools applied by the Central Bank of Iraq due to the limited Iraqi market for securities as it is still incomplete conditions as a secondary market that contributes to expanding the circulation of securities, which constitutes a burden on the use of quantitative tools of the Central Bank of Iraq, especially open market operations,As well as the weakness of the legal reserve ratio in the impact on the ability of commercial banks to grant credit, because commercial banks in Iraq enjoy high liquidity due to the high rate of inflation significantly. The research also presented a set of proposals, the most important of which is the activation of the monetary policy tools of the Central Bank of Iraq, which is currently being used to modernize, develop and increase the efficiency of the stock market in Iraq to keep pace with developments in global markets,nd developing the supervisory and supervisory role of the Central Bank of Iraq over Iraqi banks in terms of the extent of their commitment to regulations and laws and activating and activating the banking sector in a way that serves to build a banking infrastructure that keeps pace with the development of international banks. Delinquency and low capital adequacy ratio, thus hedging and beware of any problems that arise in the banking sector. Key words: monetary policy, quantitative tools of monetary policy, financial soundness, the CAMEL model, Iraq Stock Exchange Market.

A Statistical Analysis of the Effects of the Strengthening of Accounting and Auditing Standards on the Financial Soundness of Banks

Financial soundness of banks is vital not only for the firms but also countries in order to achieve sustainable economic development and the welfare of the society. There are many factors affecting financial soundness of banks both firm level and country level. In this study, it is tested whether strengthen auditing and accounting standards affects the soundness of banks or not for the 140 countries by using Kruskal-Wallis test. According to the Kruskal-Wallis test results, it can be argued that as auditing and accounting standards strengthens then financial soundness of banks rise. As a result, it can be concluded that the banking sector and the countries should give great importance to strengthen auditing and accounting standards in order to achieve better financial soundness of banks and sustainable economic development.

Effect of Working Capital Management on The Financial Performance of Banks

Working capital is a measure indicating the level of efficiency and financial soundness of banks and their ability to meet obligations and liabilities in the short-run. The placement of working capital is one of the basic tasks that fall upon modern financial management because of its possible impact on the banking performance. This research aims to study and analyze the effect of working capital management on the financial performance in banks. The study uses secondary data obtained from the published annual financial reports of 15 banks banks listed in the Iraq Stock Exchange during 2005-2018. The collected panel data is analysed through the use of EVIEWS 10. The study found that there is a clear deficiency of some banking departments about defining a management mechanism and allocating working capital and harnessing its components as effective tools in improving the banking financial performance. Moreover, cash conversion cycle is among the factors that have significant impact on the banking performance. Accordingly, some conclusions were presented, including the interest of banking institutions' management in allocating working capital well and with the aim of promoting the reality of banking procedures and taking account the process of evaluating financial performance using efficient methods, including those related to the analysis of working capital components

Is Risk Based Capital Ratio a True Measure of the Soundness of Banks? Evidence From India

The capital to risk-weighted assets ratio (CRAR) introduced by the Basel Committee on Banking Supervision (BCBS) of the Bank for International Settlement (BIS) is widely used as an important measure of the soundness of banks. However, international institutions, academics, and market analytics have increasingly questioned the reliability of the ratio which has been revised a number of times since its inception, to make it more robust. The main objective of the present study is to assess the adequacy of using CRAR as a measure of the soundness of banks. One of the most popular methods used for the analysis of the banks’ financial soundness is CAMELS framework which uses six key dimensions: capital adequacy, asset quality, management quality, earning ability, liquidity, and sensitivity to market risk. Before the introduction of CRAR, the ratio of capital to the total assets was widely used as a measure of capital adequacy in the CAMELS framework. However, when risk-based CRAR was introduced, banking regulators and policymakers started using it in the CAMELS framework for representing capital adequacy. In this paper, we argue that CRAR, as a comprehensive forward-looking measure, encapsulates all the six dimensions of the financial soundness of banks, representing various facets of banking operations, which are covered in the CAMELS framework. We, therefore, develop a theoretical framework to establish the relationship between risk-based CRAR and the important ratios used under the CAMELS framework and then empirically investigate the relationship using a panel regression model using data of Indian banks for the period 2009–2018. The results indicate that CRAR has a significant and theoretically consistent relationship with all six dimensions of the CAMEL framework. The study, therefore, does not only confirm the appropriateness of using CRAR as a measure of the soundness of banks, but also opens up a debate on whether CRAR can be an alternative for the CAMELS framework.

Non-Performing Assets - An Important Parameter of Measuring the Financial Soundness of Banks

Non-Performing Assets - An Important Parameter of Measuring the Financial Soundness of Banks

Do board characteristics affect the financial soundness of Islamic banks

AbstractThis paper was conducted to analyze the impact of the Board of Directors’ characteristics on the financial soundness of Islamic banking, using panel data regression. Composed of 67 Islamic banks over 2015-2018 period. The level of Islamic bank soundness is individually employing the Z-score measure Overall, the results of this study indicate that the soundness of Islamic banks is not adversely affected by the appointment of the independent non-executive director and the institutional director. However, the foreign director and the femal director have a positive impact on the financial soundness of banks. While, the Board of Directors’ size does not have any significant effect on the financial soundness of Islamic banks. With this study, we hope to provide new insights to the literature review andidentify the relationship between the Board of Directors and the financial soundness of Islamic banking. It has been recommended to increase the level of female presence and the foreignon the Board of Directors of Islamic banks. KeywordsBoard of Directors, Corporate Governance, Financial soundness, Gender diversity, Islamic Banking, Shariah compliance.

Comparative Financial Performance and Financial Soundness of Banks in Bhutan: Application of DuPont and Bankometer Models

Comparative Financial Performance and Financial Soundness of Banks in Bhutan: Application of DuPont and Bankometer Models

RISIKO KEUANGAN DAN TINGKAT KESEHATAN KEUANGAN BANK DENGAN SIZE, INFLASI, DAN GDP SEBAGAI VARIABEL KONTROL PADA PERBANKAN SYARIAH DI INDONESIA

This study aims to analyze the financial risk and health financial level of banks on Islamic banking in Indonesia. This study aims to get empirical evidence about the possibility of relationship and influence of financial risks (liquidity risk (Financing to Deposit Ratio), financing risks (Non Performing Financing) and operational risk (RWA for operational risk) and the financial soundness of banks (Net Operating margin, Return on Assets and Return on Equity) with the size of bank, inflation and Gross Domestic Product (GDP) as a control variable in islamic banking in Indonesia. This study used panel data analysis and used 9 islamic bank with 5 years in a period, from 2010 to 2014 so the sample used in this study were 45 data. The data were processed using Microsoft Excel and Eviews software version 8.The results showed that simultaneously financial risk not significant effect on NOM, but significant effect on ROA and ROE. Partially NPF variables only significantly influence on NOM, FDR and NPF variable significant effect on ROA, and FDR variable significant effect on ROE. The control variables used in this study had no effect on health financial level.

Does Competition Influence the Financial Soundness of Banks? Evidence from the Indian Banking Sector

The impact of market competition on banks' financial soundness or stability is a current debatable issue in the banking literature. There are two contradictory theoretical views relating to this issue. While the competition fragility view states that competition and bank stability is negatively associated, the competition stability view describes this relationship to be positive. Empirically, researchers have also observed mixed results. This paper examined the influence of market competition on the financial soundness of Indian listed commercial banks. For this, 39 banks including both public and private sector banks were taken into consideration for a period from 1999-2013. In this study, we employed the PRH-statistics to measure the degree of competition. For measuring bank soundness, we used return on assets and market to book ratio. The present effort also examined the influence of customer capital on the financial soundness of Indian banks. The study found that Indian banks are working in a monopolistic free market structure and the degree of competition in public sectors banks is more than that of private sector banks. Employing fixed effect regression model and quantile regression model, the study found that the competition is inversely associated with the banks' financial soundness, which supports the traditional 'competition fragility' view. Furthermore, the positive impact of customer capital efficiency on bank soundness indicates the importance of maintaining good relations with the customers for enhancing bank performance in a competitive environment.

Health Check-up of the Commercial Banks in Bangladesh: An Application of CAMELS Model

Banking sector is the most important component of financial system. Development of banking system contributes to the stability and sustainable economic growth. This is one of the Major Service sectors in Bangladesh economy, which divided into four categories of scheduled Banks. These are Nationalized Commercial Banks (NCBs), Government Owned Development Financial Institutions (DFIs), Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). The aim of the research is to comparatively analyze the financial soundness of the commercial banks that operate in Bangladesh. In order to achieve this we have used one of the most popular methods for the analysis of the financial soundness of banks, namely the CAMELS framework. At present, a total of 56 banks (4 SCBs, 4 DFIs, 39 PCBs and 9 FCBs) having 8794 branches are operating in Bangladesh with Tk. 8675.2 billion total assets and Tk. 6558.7 billion deposits. Quantitative comparison has been done on the basis of CAMEL ratio. CAMEL ratios mainly indicate the adequacy of the risk based capital, non-performing loan position, expenditure-income ratio, return on assets (ROA), return on equity (ROE), net interest income (NII), writing of debt, liquid assets, excess liquidity, etc. The study compares the 4 types of bank's time series performance on the basis of selected CAMEL ratios. CAMELS rating system shows that no banks have been rated 1 or Strong; the rating of 28 banks were 2 or satisfactory; rating of 12 banks were 3 or fair; 6 banks were rated 4 or marginal and 1 bank received 5 or unsatisfactory rating.

Implications of CVA for Financial Stability in Over-the-Counter Derivatives Markets: A Simulation Analysis

In this paper, we propose a simulation framework to assess the risk of financial contagion in over-the-counter (OTC) derivatives markets. We incorporate Credit Valuation Adjustment (CVA), a mark-to-market estimate of counterparty credit risk booked in a bank's balance sheet, into a model of interbank network. In this simulation framework, a bank can make a margin call and purchase protection in credit default swap (CDS) markets in order to reduce CVA. We also model the adverse market impacts in CDS markets where the bank's CVA hedging increases CDS spreads due to the lack of liquidity. A financial shock propagates through the interbank linkage of CVA and banks' CDS markets. Utilizing this simulation framework, we study the impact of four different shocks on the financial soundness of banks in the OTC derivatives markets: a large loss from a credit portfolio, a large loss from a derivative trade, a market-wide haircut rate change and a downgrade trigger. We also analyze whether and to what extent the introduction of central clearing party (CCP) attenuates the negative effect of CVA hedging on the financial stability. Our simulation results highlights the importance of understanding collateral management at bank level to assess a potential contagious risk in the OTC derivatives markets.

Dynamics of Profitability in the Turkish Banking Industry

Dynamics of profitability have important implications for the market structure and competition in the banking industry. There is a well-established literature on this issue comprising non-banking industries, however research on banking is comparatively small. Moreover, there is a lack of research comprising the dynamics of profitability in the developing banking industries. Hence, this paper focuses on the Turkish banking industry to analyze both the dynamics and determinants of profitability in the Turkish banking industry over the period 2006:4-2012:2. First, two competing hypotheses, persistence of profit and competitive environment hypotheses are tested using a dynamic panel data model. Variables representing bank size, credit risk, managerial efficiency, financial soundness, market competition, monetary policy and economic freedom are also incorporated in this model to investigate the determinants of bank profitability. System Generalized Method of Moments (SGMM) is used to estimate this dynamic model. The evidence from the findings indicate the validity of the persistence of profit hypothesis. Moreover, bank profitability has been mostly affected by the capital ratio which could have further implications through the Basel III period. The results also indicate positive impact of improvement in financial soundness of banks on profitability.

Distress in European Banks Before and During the Financial Crisis

Using a unique data set on bank distress, this paper provides novel empirical evidence on the determinants of bank soundness in the European Union (EU) as a whole. Estimation results support the hypothesis that bank risks have converged across EU members, providing empirical justification for introduction of the pan-European system of financial regulation. We show that asset quality and earning profile of banks are important determinants of bank distress next to leverage, and should be taken into account when designing new financial regulation in the EU. Market discipline both on the side of depositors and stock market participants plays role in the EU, supporting the notion that transparency and dissemination of financial information would contribute to the financial soundness of banks. We also provide evidence in favor of contagion effects, relatively higher fragility of concentrated banking sectors, and hazards associated with high share of wholesale funding.

Indian Banking: Current Issues and Challenges

The banking system, which constitutes the core of the financial sector, plays a critical role in transmitting monetary policy impulses to the economic system. During the last two decades a large number of developed and developing countries have experienced crisis in their banking sector. India escaped similar banking troubles due to a tightly controlled economy, which existed until the early 90s, wherein opaque accounting practices were widely accepted. Prudent regulations prescribe specific terms of capital adequacy, asset classification, income recognition and provisioning, etc., while an efficient supervisory system ensures adherence to such norms to maintain a sound and solvent financial system. The emergence of banking sector reforms has been a derivative of economic reforms seeking to upgrade the operating standards, health and financial soundness of banks to internationally accepted levels.